On Monday, August 5, 2024, Indian equities corrected by 3% following nearly 13% drop in the Nikkei (the Japanese benchmark index) and steep declines in the Korean and Taiwanese markets. Subsequently, US markets fell by 3%. While most markets on Tuesday were either flat or positive, global markets have been down between 3% and 10% since the beginning of last week.

The key reasons for this sharp decline are as follows:

The borrowing in Japanese currency, yen, and investing in other markets has been impacted by the Bank of Japan's (BoJ) recent interest rate hike. The yen has appreciated by 10% against the dollar in the past couple of weeks, following the BoJ's rate hike from 0.10% to 0.25%.

With rising interest expenses and a stronger Yen, the carry trade has become costly. Investors are being forced to sell underlying securities before the trade becomes unviable. It is estimated that at least $1 trillion worth of such exposure is outstanding across all asset classes.

For context, Lehman Brothers had $600 billion in debt at its peak........

© NDTV